An explanation of the Annual Percentage Rate (APR)

Why do we need a rate of charge at all?

We live in a complex world, and face many different choices for the products and services which we buy. To make decisions on which to buy, we may use a variety of different aspects, such as

•    price
•    quality
•    expected life
•    seller's name and reputation.

Buying credit is no different, whether you're borrowing money to buy goods or services, or just taking out a loan so you can pay off previous debts. But it is harder to work out the cost of credit than many other services because there can be different repayments at different times. So, if we are to be able to compare the costs of credit between different offers, we need a measure to take account of all of them.

The history

The need for a measure for the cost of credit has long been recognised. Legislation such as the

•    Pawnbroking Acts (dealing with facilities allowing you to a deposit a valuable item at a pawnbroker in return for a short term loan)
•    Moneylenders Acts (dealing with money loans to borrowers), and
•    Hire Purchase Acts (dealing with agreements to supply goods on credit)

all contained requirements for a specific rate of charge to be quoted in agreements, which was a tremendous help if you wanted to compare lots of credit agreements of the same type, but absolutely no good if you wanted to compare the costs of credit between different types of facility because each Act laid down different rules.

In 1968, the then UK Government set up the Crowther Commission to look into the credit market, and their report was published in 1971, leading to a new Act, the Consumer Credit Act 1974, which took over responsibility for the whole industry.

The new legislation created a new rate of charge, the APR (strictly the Annual Percentage Rate of the Total Charge for Credit).

What is the APR?

The APR is a measure of the cost of each credit agreement, taking into account all the charges made under the agreement. It enables you to compare the cost of each deal and work out which is the best value for you. So you can compare one hire purchase agreement with another However, you should not attempt to compare a mortgage with a credit card deal. Each one provides different terms, so you should not expect to compare the two.